Company car salary sacrifice schemes speed up

If you read nothing else, read this…

  • A salary sacrifice car scheme can work as a cash-free, cost-neutral benefit for employees, as well as a useful staff retention tool.
  • Expect it to take between three and six months to set up and implement a scheme.
  • This type of scheme can be delivered as a standalone benefit or bolted on to an existing flexible or voluntary scheme.
  • Recognise it may require co-ordination between HR, finance, legal, payroll and the leasing company, as well as any existing flexible or voluntary benefits scheme provider.
  • Put in place contingencies or insurance to mitigate the risk of early termination and/or maternity or sick leave.
  • Have a strategy for communicating effectively both the benefits, we well as the responsibilities of the scheme to employees.

Interest is growing in company car salary sacrifice schemes, but employers must recognise the pitfalls as well as the advantages, says Nic Paton

Company car salary sacrifice schemes, one of the newer benefits to be offered on this basis, are becoming an increasingly popular perk. In part, this is due to factors such as the tax breaks for low CO2-emitting cars and employers’ focus on retention as the economy moves into recovery.

Ben Creswick, head of business development at contract leasing firm Zenith Provecta, which has offered a salary sacrifice product since November 2008, says: “A vast number of FTSE 350 employers are actively looking at putting a scheme into place. It tends to hit a lot of the right notes: because it is around low-CO2 cars, it meets the environmental objectives; it helps firms to manage their grey fleet; and it can be a powerful, cash-free retention tool with which to keep employees.”

Creswick says the company secured about four new schemes in the whole of last year, but this year it expects to see six new schemes go live between January and May alone.

Other providers are reporting similar growth. Contract car hire and leasing firm Tusker, which launched its offer back in October 2008, has a dozen schemes in operation and 11 more were due to have launched by last month, says managing director David Hosking. In the past six months, Tusker has had approaches from 60 to 70 companies, as well as “a flood of enquiries” from public sector organisations.

Meanwhile, LeasePlan had received 58 prospects from employers, covering a total of more than 470,000 employees, ahead of the launch of its own salary sacrifice scheme at the end of March, according to head of product services, Sarah Easton.

More providers to enter market

Further providers are set to enter the market. Hitachi Capital Vehicle Solutions will do so this month, and Lex Autolease is expected to dip its toe in this year. Paulo Larkman, head of fleet consultancy services at Lombard, says: “This time last year almost no one was talking about it, but probably 50% of our major customers are now.”

But before taking the plunge, fleet and benefits managers must fully understand what they are getting into. Salary sacrifice as a concept has been around for the best part of a decade, and car schemes work in a similar way as schemes around any other tax-efficient benefits in that an employee surrenders part of their salary in return for a non-cash benefit, in this case, a new, fully-managed company car.

For the employee, the benefit comes in the savings they make on income tax because they are sacrificing gross income, as well as potential savings on value-added tax (VAT) and national insurance contributions (NICs). These should all more than offset any rises in benefit-in-kind company car tax.

Most schemes will be weighted towards low CO2-emitting vehicles, because cars emitting less than 120g of CO2 per kilometre now have a much lower benefit-in-kind tax value. On average, staff should be able to save between £70 and £200 a month compared with sourcing, insuring and maintaining a car themselves, according to Zenith.

Scheme could cost nothing

A well-constructed scheme should cost the employer nothing, because the sacrificed amount will normally cover the post-tax, discounted whole-life cost of the car, excluding fuel. The employer may also potentially be able to benefit from NIC savings on the portion of salary that is not paid.

But car salary sacrifice schemes can also have pitfalls, says Mark Sinclair, director at leasing firm Alphabet. For example, staff can only sacrifice their salary down to the minimum wage, so if they go on long-term sick or maternity leave and can no longer sacrifice the cost of the car, the employer may have to step in and carry that cost.

Employers also have to consider what they will do if an employee leaves the company or is made redundant mid-way through the agreement and the employer is then faced with an expensive early termination charge. One common solution is to have insurance or a contingency fund in place against such eventualities, although employers may need to weigh up how much of the premium for this they add into the cost of the agreement. Alternatively, they could stipulate staff foot the bill if they leave within a certain period.

“Employers need to look at the structure of the scheme, how is it going to be delivered, which staff will go to for a quote, and so on,” says Sinclair. “The leasing firm may well be able to help with that, but the HR director and finance director do need to be in agreement.”

Employers may also need to consider any potential impact on their pension arrangement, particularly if they offer a final salary scheme. For example, they may have to adjust their pension to take account of employees’ notional rather than actual salary.

Someone to handle fines

Zenith’s Creswick adds: “Employers may also want to consider whether they need someone to handle any fines or to authorise each order and what impact there will be on internal resources. For example, will there be any issues around branding or marketing, how will they communicate it to people, how will payroll be integrated, and so on?”

It can take three to six months for an employer to implement a scheme properly, says LeasePlan’s Easton. This includes telling HM Revenue and Customs what it is doing, as well as deciding whether it wants to bolt the perk on to an existing flexible benefits plan or offer it as a standalone perk.

“Employers need to look at a lot of things: what sort of cars, whether they are going to limit it to a certain CO2 range, who will be eligible, what risks they will be adding into the cost, whether it will be through an existing provider or standalone, where it will sit with regard to finance, payroll, legal and HR, and so on,” she says.

“It may also be a good idea, before they get too far down the line, to carry out a short survey of employees to gauge how much interest there is and what sort of scheme would appeal to them. The scheme will only work if people take it up.”

Case study: Freshfields spreads the word

Since law firm Freshfields Bruckhaus Deringer introduced a salary sacrifice car scheme last July, 18 employees have signed up, with two more in the pipeline. Adam Brooke, the firm’s employee benefits manager, says: “At the moment, take-up is still fairly low, but the word is spreading. For example, we now have three in one department, so people are beginning to talk about it. We are hoping to get around 30 cars in the scheme during the year.”

The scheme, provided by Tusker, is bolted on to the company’s existing flexible benefits plan, Benefits Plus, (provided by Vebnet) and is available to all 1,800 staff.

“Communication is very much the key,” says Brooke. “For example, our flex scheme has an annual enrolment window, which means staff cannot change benefits for a year after they sign up. So although if someone goes on maternity leave or long-term sick leave we do say we will cover the cost, it is important that employees understand what they are committing themselves to.

“Also, if they leave the firm within nine months of signing the agreement, we require them to cover the cost of early termination.”

It took Freshfields three months to finalise all the details for the scheme, including getting internal sign-off from finance.

“It is important you have clear procedures in place,” says Brooke. “With us, there is close co-ordination between the employee, HR, payroll and Tusker beforehand about the choice of car and the whole process.”

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